Regional Productivity, Job Turnover and Profitability under Hukou Allocation System

We investigate a possible role of the Hukou allocation system (China’s household registration system) in influencing regional productivity through a firm’s strategic behavior with respect to the retention of workers. We show that the level of regional productivity can be low due to inefficiency arising from the retention of mismatched workers when Hukou are allocated to workers through their employer rather than being allocated to them directly. This paper offers a new explanation for an observed difference in firm productivity between Beijing and Shanghai in China, and demonstrates that the way of allocating Hukou is a source of productivity differences across regions.